How to Buy and Sell Shares

This article will explain how to buy and sell shares and also what shares are, where they are available, and most importantly which shares to buy or sell.

Shares are publically traded around the world on their corresponding stock exchanges. In Australia, shares trade on the ASX (Australian Securities Exchange). On a global scale commonly referred to exchanges including the New York Stock Exchange (NYSE), Tokyo Stock Exchange (TKE), London Stock Exchange (LSE) and the list goes on. The basic purpose of a stock exchange is to organise, regulate and facilitate the purchase and sale of shares in publically listed companies. If you want to buy or sell shares you need to do so on the corresponding stock exchange, which is also called the ‘secondary market’.

What is a Share?

The primary reason why a company would ‘go public’ is to raise capital. In other words, the company will sell shares or portions of the business to investors in exchange for capital. The money raised is called equity capital. The initial raising when a company decides to go public is called ‘Initial Public Offering’ or ‘IPO’. Once the intitial raising is complete, these trades can then be publically traded on the share market, giving investors the opportunity to buy or sell these shares in a regulated manner. The most common type of a share is an ‘Ordinary Share’. An ordinary share provides the owner with one voting right and the ability to participate in dividends.

How can I Buy or Sell Shares?

An investor must use a broker to buy or sell shares on the stock exchange. In Australia we have a number of brokerage providers for example nabtrade, CommSec, Westpac or E-Trade, just to name a few. The broker acts as an intermediary between investors and the company. He therefore provides investors with some kind of system that faciliates the transaction of shares. For each transaction the broker charges you a fee which is commonly called ‘brokerage fee’ or just ‘brokerage’. The fees may vary depending on your provider. When it comes to brokers you have generally two choices:

• a discount or online broker. The service of discount or online brokers is generally limited to execution. These brokers facilitate the transaction through an online portal, usually with relatively low brokerage lower fees. Most online brokers require you to execute your trades manually, however, some can also execute trades over the phone. The advice given is usually limited and generally, you have to manage your portfolio yourself.
• a full-service broker. Full-service brokers generally execute trades on your behalf and provide additional stock market-related advice. Before trades are executed the broker confirms the transactions via phone, e-mail, or through any other means of communication. Most full-service brokers provide advice on which shares to buy and therefore charge a larger fee. Full-service brokers can be useful for inexperienced investors or for those who want their portfolio managed by a third party.

It is important to incorporate all brokerage fees (buying and selling) into your calculations before investing, as it may have a significant impact on your returns.

Which Shares to Buy?

This is the tricky part. An investor must understand the RISKS AND BENEFITS associated with buying shares before any shares are bought. This brings us to the next important point which is diligent research. Research is key to successful long-term share investing. Understanding the economy and more specifically the company you wish to invest in is crucial. As with many investors, the problem arises when they don’t have the time or expertise to research adequately. This is when the use of a Managed Fund or a Research Professional comes in handy. A managed fund basically takes over your investment decision making as the fund manager will do the stock-picking in exchange for a management fee. A Research Professional, on the other hand, provides research and recommendations on specific stocks. You retain control over your investments, however, the professional perform the research for you and eventually recommends stock to you. Generally, it is up to your discretion if you follow these recommendations.

When Should I Buy and Sell Shares?

The best time to buy a stock is once you have completed your research and concluded that the company is a good investment. One of the best rules that has stood the test of time is to buy great companies at the right prices. Many investors complement fundamental analysis with technical analysis in order to time the purchase. Trying to time your purchase with movements in the market requires an advanced skill and this is when a research professional might be helpful for inexperienced investors.

The best time to sell can be a difficult question and a dilemma that many investors face. Do you take profits now or do you hope the rise continues? Or on a falling stock do you cut your losses now or do you hope it regains lost ground? Keeping up to date on market conditions and more specifically company developments can assist in making these difficult decisions. Having a research professional to contact can be invaluable when selling decisions need to be made. Every stock behaves differently, hence there is no unique rule as to when it is the right time to buy or sell the company. The decision should be made based on fundamental and technical analysis and taking into account your personal financial objectives as well as your willingness to take the risk.